Minnesota House passes tax bill, raises taxes on biggest earners

Rep. Greg Davids, R-Preston, speaks in favor of an amendment during debate on the tax bill in the Minnesota House on Wednesday, April 24, 2013, in St. Paul. (Associated Press: Jim Mone)

House DFLers are going after "The One Percent" in a big way.

Make that the 1.1 percent of Minnesotans who earn the highest incomes.

The DFL-controlled House passed a tax bill -- 69-64 with all Republicans voting "no" -- Wednesday, April 24, that creates a new, fourth income tax bracket with an 8.49 percent rate -- up from the current 7.85 percent rate -- for the top-earning 1.1 percent of Minnesotans -- couples with taxable incomes over $400,000.

On top of that, the bill would impose a temporary 4 percent income tax surcharge on the 0.5 percent of taxpayers making more than $500,000 a year.

"We're going to ask those with the highest levels of income to pay a little more," said House Taxes Committee Chair Ann Lenczewski, DFL-Bloomington.

Her bill would raise taxes by $2.6 billion over the next two years.

In addition to taxing top earners, it would increase state taxes on beer, wine, liquor and cigarettes and scrap tens of millions in corporate tax breaks.

DFLers would use the additional revenue to wipe out a projected $627 million deficit, provide property tax relief to nearly 1 million homeowners and renters, and pump more money into public education.

Those are the issues DFLers campaigned on last year, House Speaker Paul Thissen, DFL-Minneapolis, said. "Today we are delivering on those promises."

After years of bouncing from deficit to deficit, Lenczewski said the bill would get the state off a budget roller coaster.

"We have a deficit.

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We keep having them, and we're tired of them. We want to get rid of them in a permanent, balanced way," she said.

Republicans called the bill a "tax on success" and warned it would drive businesses out of the state.

It wouldn't just tax top earners, said Rep. Greg Davids of Preston, the ranking tax committee Republican.

"If you are the poorest of the poor or the richest of the rich, you pay more," he said, referring to the cigarette and alcohol tax increases.

Rep. Ann Lenczewski, DFL-Bloomington, speaks out against an amendment during debate on the tax bill in the Minnesota House on Wednesday, April 24, 2013, in St. Paul. (Associated Press: Jim Mone)

DFL senators unveiled a bill earlier this week that would increase income taxes on far more Minnesotans -- the top-earning 6 percent -- and also extend the sales tax to more goods and services.

If the Senate passes that bill next week, as expected, negotiators from the two chambers and Gov. Mark Dayton will try to hammer out a final tax package by mid-May.

While they differ on other issues, the DFL governor and majorities in both houses support on an income tax increase on top earners and a cigarette tax hike, so they're likely to become law.

Here's how the House bill would affect some taxpayers.

IF YOU GET A PAYCHECK

DFLers contend 98.9 percent of you would not pay higher income taxes.

But the 27,300 taxpayers with taxable incomes above $226,000 for single persons and $400,000 for couples would pay the new, top 8.49 percent tax rate. Their tax increases would average $3,700 a year.

About 13,000 taxpayers who earn more than $500,000 a year would also get hit with a two-year, 4 percent income tax surcharge. Their average taxes would go up $38,000 a year.

Minnesota would temporarily have one the highest income tax rates -- 12.49 percent -- in the nation.

IF YOU DRINK ADULT BEVERAGES

The first tax increase on alcohol in 26 years would raise the cost of beer, wine or liquor by 7 cents a drink, Lenczewski said. It would raise $350 million over the next two years.

If you drink a beer a day, she estimated the tax increase would cost you $25 a year.

But the liquor lobby asserted the tax increase would cause a 10 percent price increase. The Distilled Spirits Council of the United States calculated Minnesota's excise taxes would go up 120 percent on liquor, 500 percent on beer and 600 percent on wine.

Lenczewski responded, "If somebody's charging more than (7 cents a drink), they're just making a profit." They would be "bilking their customers," she said.

The fate of a booze tax is in doubt. DFL senators oppose it, and Dayton has said he doesn't support it.

IF YOU SMOKE

Cigarette taxes would go up $1.60 a pack -- to $2.83 -- under the House bill. That would raise about $430 million over the next two years, which Lenczewski said would just make a small dent in the billions in tobacco-related health costs to the state.

Both Dayton and the Senate have proposed 94 cents-a-pack cigarette tax increases.

IF YOU OWN A HOME OR RENT AN APARTMENT

Nearly 1 million homeowners and renters would either become eligible for property tax refunds for the first time or receive larger ones if the House bill becomes law. The average homeowner refund would increase $212, while renters' refunds would go up $138 to $179.

The House measure also appropriates $110 million more in state aid to cities and counties to hold down property taxes.

IF YOU OWN A BUSINESS

An estimated 3.3 percent of business owners would have to pay the new, top income tax rate.

"This will not affect mom-and-pop small businesses," Thissen said.

Mike Hickey, state director of the National Federation of Independent Business, acknowledged that most small businesses would be exempt from that tax.

"But it will negatively affect some of the most successful small businesses that employ many people," he said. "These are exactly the companies that are likely to grow and help fuel our recovery. Raising taxes on them is absolutely counterproductive."

Corporations would lose $310 million in tax breaks that shelter overseas profits or provide what DFLers called outdated or ineffective subsidies.

The House bill would require Amazon and other Internet retailers to start collecting state sales taxes, ending their advantage over in-state retailers that currently collect those taxes.

Businesses would get an upfront sales tax exemption for purchases of capital equipment.

IF YOUR KIDS GO TO A PUBLIC SCHOOL

The House bill would pay back the state's $854 million IOU to schools that was used to balance previous budgets. That money would come from the temporary income tax surcharge to top earners.

The measure also raises revenue to pay for expanding early childhood education, all-day kindergarten and additional funding for K-12 schools and state colleges and universities.